Choosing active means you have the goal of outperforming the market in some form. Perhaps it is about achieving higher income. Perhaps higher overall growth. Or it might be about lower volatility to ensure stability of returns. All this typically comes at a higher cost, but are you getting what you are paying for or have you invested in an index-hugger with a good marketing package?
The good news is that you can check if your fund is an index-hugger or not with a few simple checks which are available on a fund’s website and performance updates.
It’s easy to assume that an active fund can invest in anything – but that can be a misconception. While some companies may have an unlimited universe, others may be restricted.
Usually, the fund strategy has particular parameters for investing within, for example, it might only be able to invest in stocks that form part of a specified index (termed as the ‘investment universe’) or it may be required to replicate the index to an extent but differ on specific criteria – for example, it might remove stocks with certain debt levels, or only select stocks from the index with a particular yield.
If the strategy says ‘benchmark unaware’, this means it can differ as much as it wants from the benchmark.
This is outlined in the product disclosure statements for the funds.
For example, the investment universe for the Chester High Conviction Fund is the S&P/ASX 300 Accumulation Index – and performance is benchmarked against this. It is restricted to a maximum of 40 stocks, no more than 10% of the portfolio can be held in any one stock and up to 20% of the portfolio can be held in cash.
While, as another example, the Artisan Global Discovery Fund has an investment universe that is largely reflective of the MSCI All Country SMID Cap Index – but doesn’t have a limit on market-cap so can continue holding stocks outside of the index. It is restricted to 40-60 ‘best ideas’ and up to 20% of the portfolio can be held in cash positions.
This gives you a picture of how alike a strategy might be compared to the benchmark and therefore gives you an impression to begin with of whether the fees are fair or not. It’s not the final picture though.
Depending on the reporting offered by a fund, you may not always find all these measures in the fund documentation, but each can provide you with a picture of whether or not the fund tracks the index. If you can’t find all these measures on the fund page, sometimes independent research companies have calculated this data – in some cases you may need to pay for access.
Active share is a measure of how different a fund’s portfolio is compared to the benchmark it tracks. It is calculated by comparing the difference between weights of all the underlying holdings in the portfolio to the weights of the holdings in the index.
A score below 60% is generally considered to be a lot like the index and can be termed ‘shrouded indexing’ or ‘closet indexing’. A score above 80% would be considered very active, while 100% would mean there is no cross-over in holdings or weights with the benchmark.
You can typically find the active share in the performance reports for the funds.
In the previous examples, the Chester High Conviction Fund has an active share above 80%, and the Artisan Global Discovery Fund has an active share of 96.2%, based on their quarterly fact sheets as at 30 June 2026.
To put this into perspective, the SPDR S&P 500 ETF, which is designed to be a passive index-hugging investment, has an active share of 0% meaning exact replication of holdings and weights.
Tracking error is more about performance than holdings. It’s also a measure not typically used for active funds because they should deliberately drift from the benchmark.
Tracking error measures the standard deviation of the difference between the fund’s performance and the benchmark’s performance over time. It is typically seen more in passive funds to demonstrate that the fund is performing in line with the benchmark. If you see it with an active fund and the tracking error is low, then you may have an index-hugger on your hands.
The SPDR S&P 500 ETF, as an example, has a tracking error between 0.04%-0.05% to show that it maps very closely to the index.
R2 shows how a fund’s returns move with the market index, its correlation with the benchmark. You want to see a percentage below 70% to indicate active management. Some fund managers will publish this data, and others won’t. You can typically find it on independent financial data provider sites (which may be paid services).
Other measures within this category include Alpha and Beta. Alpha is the excess return above the market, while beta is market exposure.
Using the previous examples and based on independent financial data provider sites, the Chester High Conviction Fund has an R2 of 25%, Alpha of 2.28 and Beta of 1.33, while the Artisan Global Discovery Fund has an R2 of 48.15% for the last year to 31 July 2026, Alpha of -6.76 and Beta of +0.79.
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You can also look to more simple options to give you an idea of how closely your fund tracks the index, such as comparing the fund’s top 10 holdings and sector weightings with the index. This offers you a picture to suggest active management and positioning where there is variation and little cross-over.
For the Chester High Conviction Fund, for example, there is no crossover in the top 10 holdings with the S&P/ASX 300 Accumulation Index. There is variation in sector weightings, with the Chester High Conviction Fund being overweighted compared to the benchmark to real estate, healthcare, energy, industrials and gold, while holding a significantly lower weighting to financials and lower weightings to other dominant sectors, like materials.
The Artisan Global Discovery Fund also has no cross-over in the top 10 holdings with its benchmark, the MSCI ACWI SMID Cap Index. There is variation in sector weightings too, with the Artisan Global Discovery Fund holding significantly higher weights to healthcare and technology compared to the benchmark, while being very underweight in financials and materials compared to the benchmark.
Taking the time to work out how different your active fund is to the benchmark it is following can help you decide if you are getting what you are paying for and the extent to which you should be paying more.
Depending on your strategy, you may actually want your active fund to be close to the index with some particular differences. This may still mean paying more but not significantly so – if your fund is drastically different to the index, this is where you would see a bigger difference in fees. Alternatively, if you find your fund is an index-hugger with no differences, perhaps it is time to revisit passive strategies with lower management fees.
Don’t forget that difference in index tracking is one thing; performance and fees are also key. You aren’t just paying for the active management, you are paying for a goal of outperformance. If your active fund isn’t delivering this in the performance, after fees, across market cycles, then perhaps it is time to reconsider its role in your portfolio and what would best suit your needs, goals and circumstances.
The Chester High Conviction Fund is designed for investors who aim to grow their wealth while preserving their capital. The fund’s investible universe is the S&P/ASX 300 Accumulation Index.
The Fund invests in a portfolio of global small and mid-cap companies poised to grow their profitability and investor returns.
Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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